Why Aren't We Trying To Solve The Too Big To Fail Problem?

from the getting-it-wrong dept

Last year, with all the talk of companies being "too big to fail" and governments bailing out such companies left and right, we had what seemed like a simple suggestion. Recognizing that it is possible for a company to be "too big to fail," in an intertwined economy, because the fallout would create even more problems, we suggested that a requirement for taking government money would be to become small enough to fail. That could mean spinning off parts, selling off parts, shutting down parts, exiting businesses, shrinking businesses -- whatever. There just needed to be some sort of guarantee that within a certain time frame, the company wouldn't be so tied up that if it failed it would bring down the rest of the economy. And, if a company didn't want to deal with those restrictions, then fine, it didn't need to take gov't bailout money.

The idea didn't get much traction (not surprisingly), and now some are pointing out that the opposite seems to be happening. Our solution to dealing with companies that are too big to fail has been to make them bigger and bigger, and pass off the question of "too big to fail" to other politicians in the future -- at which point the problems will likely be even bigger and harder to deal with. Propping up companies that are too big to fail, without a clear path towards making them small enough to fail, is a recipe for a future disaster.

"....we suggested that a requirement for taking government money would be to become small enough to fail"
Giving out substantial amounts of government money on the condition that the company dismantle it's self means basicaly throwing the money to the people who caused the problem in the first place - not much return on investment for the tax payer and no guarantee that companies won't again become too big.

I believe that the current Democrats see companies that are "too big to fail" in a couple ways. First, those companies make good scapegoats when you want to decry the evils of "unbridled" capitalism and "evil" big businesses. Second, those companies are the prime candidates for nationalization, giving more power to the government.

That's my view of the Democrat agenda, but they're not the only ones to blame - Bush holds some responsibility for the "too big to fail" problem, and I really don't know what the agenda is there on the part of the Republicans involved. It could just be pure ignorance. It could just be the emotional ideal that they don't want to be responsible for the sudden unemployment caused by that failure - even if that unemployment is just fringe unemployment as these companies retool and new ones start.

Why is the government throwing 'bailout' money at these companies? Are we (the taxpayers) out of our minds to let this happen?

I understand that some of these large institutions need some capital to stay afloat and it's in our collective best interests to help some of the companies avoid insolvency. Isn't that what a down-round is for? Why are we not reading about cap tables and how many shares and Board seats we (the government) will be issued for our investments? Will this model dilute the value of current ownership positions - you betcha! Too bad! If you don't like the government investment, don't take it. Next time the shareholders will pay more attention to who they're electing to govern these companies.

It's time for OUR Board of Directors - the Government - to get a little more predatory and behave more like a VC. Let's take a good piece of these companies that need capital. Our gains from those that recover and flourish again will cover our losses from those that don't recover and fail.

What is the 'Too Big' litmus test?

I too like the idea of periodically assessing companies for 'Too Big To Fail-ness', but I have not been able to come up with a formula that could be neutrally and fairly applied to any company in any industry.

Some hairy points to consider:

1. If a company fails in isolation (other companies in the same market are not failing), does the test need to be different from when entire markets start to fail?

2. What is the process by which companies that fail the 'Too Big' test are divided into parts that are no longer too big? Is the Board of Directors given a 90-day warning? Does the federal monopoly monitoring/compliance department dictate how the downsizing occurs?

That being said, these are solvable problems - just very hard ones. The intuitive appeal of this concept makes me nervous though....

How big is too big?

I don't think the government has the bargaining power to require companies taking bailout money to become small enough to fail. If a failure would indeed torpedo the entire economy, then the government really doesn't have a choice.

They key is to keep companies from becoming to big to fail in the first place. How might this be accomplished? At what point is a company too big to fail?

Given complete information as to who owns what financial assets, a quantitative measurement might be devised. Such a measurement could determine how "intertwined" a company is, or how much it's failure would damage the greater economy.

It will be argued of course that such quantitative models failed miserably at predicting the risk of various financial products and led to our current situation. We have seen however that the real problem here was that the models were fed bad or incomplete data, and used to evaluate things more complex than they were intended for.

Re: What is the 'Too Big' litmus test?

I too like the idea of periodically assessing companies for 'Too Big To Fail-ness', but I have not been able to come up with a formula that could be neutrally and fairly applied to any company in any industry.

The formula is simple: how many of your once-and-future execs have you been able to insert into the current administration?

What needs to be done is companies need to be relieved of the rights of human beings. This was all possible because of that law that was passed over a century ago that gave them that power. They've shown they can't be trusted with it, so that power should be taken away.

Re: Re: How big is too big?

And the next question is whether socialism can actually save it. The free market died when capitalist organizations begged the government for funds.

But the problem with large businesses (and IP monopolies) is that they are best at eliminating any market, much less a free one. The irony is the best business in a free market is quickly rewarded by becoming the only business. Then they are too big to fail.

I've been saying similar things for quite awhile about the too big to fail problem. Couple that with the fact that small companies tend to provide the most innovation.

The challenge that I see is that companies need to grow to be healthy, so do we really want to set a cap at which point you can't grow without being forced to split?

Maybe we need to look to biology for an answer. two animals come together, procreate, and yield new animals. The original animals only last so long. Maybe companies need to do the same, so the loss of any individual company isn't catastrophic (and maybe even is certain, just like animals). Highly successful companies would be those with many independent progeny. The financial part would be easy - a parent company could still have stock (although not a majority) in its children. The hard part would be having parent companies let go of controlling the spin-offs.

Distraction

You're focusing on the wrong aspect of the crisis. "Too big to fail" is only a distraction. Why are they considered "too big"? Why is it considered acceptable to have a system predicated on creative destruction for growth, but have certain bits of it off limits?

This is only an excuse by statists and socialists to allow for more prevalent intervention by the state. Our focus on their "magician's left hand" of "too big to fail" is allowing it to happen.

Too Big to Fail

Right on, Michael - though I will say, some things require that the maker be big - something like giant aircraft, to be safe and efficient, require giant makers.
I think there is another dimension to this. Success builds a softness that does not fit the capitalist model. A giant auto maker, over time, pays uneducated workers 100-200K per year; and that is a problem. In time, such a company becomes so inefficient that the only way they can even hope to survive is to sell "vapor" in the form of giant "prestige" vehicles, completely losing sight of utility.
In such cases, the only option might be failure, big or small.

Re: Too Big to Fail

Too Big to Fail,

While we had our attention elsewhere for the last 100 years or so, the Walking Corpse have taken over our govt. Our govt. is for the benefit of business, plain and simple.

Originally these Monsters (the Corporations) were illegal and could exist only in limited form, revisited every 5 years to see if they still deserved it. Our founding fathers saw plainly the threat of these soulless, heartless entities in the workings of the British East India Co. and the Hudson Bay Co. They warned us but we have been bamboozled. The antiMonopoly powers have been gutted. Because of this the big fish have eaten the little fish until all we have left are big, bloated rotten predators on our economy. Break them all up, limit their size, revoke the Corporate Charters, allow only personal ownership. Adam Smith would not have allowed these predators to eat us alive. No bonuses, fire all the top tiers, end corporate campaign contributions, ban any business that moves off shore to avoid taxes from bidding on any tax dollar funded project at any level. End political prostitution by enforcing concrete term limits and force them to go back to work under the laws they drafted.

Rose colored glasses at work again.

Recognizing that it is possible for a company to be "too big to fail,"
No company is too big to fail but our politicians will never understand this. They're not looking to save the business. They're looking for a quick fix.

What politicians fail to realize is when a big business fails, it generally creates more business willing to take over where the giant once stood, more often being better as they've learned from the mistakes of the giant.

All this bailout is doing is pushing back the inevitable and the time needed for business to correct itself, and will eventually cause an even bigger crisis.

It is all about consequences. There have been none for the politicians or the CXOs of these companies so they have no reason to change behavior. We are stuck in "drive your company into the ground, get a bonus" mode. Until enough people care enough to throw all of congress out on their buts nothing will change.

too big to "gracefully" fail

What we need is a change to anti-trust law.
Any company that is big enough to cause undue stress on the national economy by failing (require a bailout) needs to be broken up into companies that can fail one by one without undue stress on things.
This would also mean they can't buy each other up because at some point they would again be "too big" and the law would prevent that.

Too Big and Failing

Too Big to Fail

"Too Big to Fail" is the Obama Administration's excuse for taking over the private sector. The phrase has been broadly applied to refer to the government's policy to "bail out" corporations. Then replace the CEO, determine the new future of the corporation, eliminate jobs, and say that they are protecting our economy. With Congress and the President carelessly making decisions about the future of our Country, when do We the People decide that Our Government is Too Big to Fail? Let's see how our government is doing so far.

Economy - FAIL
We were warned about the stimulas bill that if it did not get passed then "unemployment could reach as high as 8 percent." Today the unemployment rate stands at about 9.5 percent. The good news is that recovery.gov estimates that over the next 2 years California will have 396,000 jobs created/saved due to the stimulas package. Which is it, created or saved? Compare that number to the 800,000 jobs lost in California already. The good news is that the result of the bad economy is that California's congressional delegation is unlikely to grow and could even lose a seat.

Foreign Policy - FAIL
President Obama is so committed to stopping the foreign threats of North Korea and Iran's nuclear programs that he prempted Hillary Clinton's scheduled foreign policy address with his own on health care. What else is there that we can do about foreign threats that we haven not already tried? We have already adopted tougher language, approved new and tougher sanctions, and we already appologized for the two journalists held by North Korea. Maybe Iran and North Korea will agree to stop their weapons programs in an unilateral disarmament treaty.

Enviroment - FAIL
After last year's headline that over 650 International Scientists, including Nobel Prize winners, dissenting with Man-Made Global Warming claims, Congress is fast at work on Cap-and-Trade. So, under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally. It then distributes or auctions off emissions allowances that total the cap. Does this also count all of the C02 being emitted by Congress while coming up with stupid ideas? So, out of all of the possible pollutants we are going to protect ourselves from Carbon dioxide, which we emit. I guess Nancy Pelosi was sick they day they discussed photosynthesis in school.

Healthcare - Desperatly wanting to FAIL
Now that the economy is back on track and there are no foreign threats, the Obama administration is free to deal with their largest domestic socialization project, Public Healthcare. Should they succeed, tens of millions of Americans will potentially be joining a new public insurance program and the federal government will increasingly be involved in treatment decisions. So, not only will you have to wait longer at the doctor, the new Health Czar will decide if you get a rectal exam before Congress can pass any more laws.

Immigration Reform - FAIL to act
President Obama once said on the campaign trail, "We need immigration reform that will secure our borders." Senator Charles Schumer (D-NY) unveiled the major components of comprehensive immigration reform legislation headed for a debate this fall. Senator Schumer takes the hard stance in his first principal that "Illegal immigration is wrong." Now that we are clear that Illegal Immigration is possibly illegal, how can we fix it? Senator Schumer states: "All illegal aliens present in the United States on the date of enactment of our bill must quickly register their presence with the United States Government, and submit to a rigorous process of converting to legal status and earning a path to citizenship" and future voters.

I suppose that being Too Big to Fail is different from being Too Big and Failing. However, the Democrats are really trying to blur the line.